Broadcast Retirement Network’s Jeffrey Snyder discusses how employers can use cash balance retirement plans to complement their existing retirement strategy with Pentegra Retirement Services’ Bruce Harrington and Kate Blake.
Jeffrey Snyder, Broadcast Retirement Network
Well, joining me now, Bruce Harrington and Kate Blake, both from Pentagra Retirement Services. Bruce, great to see you again. Kate, great to meet you.
Kate Blake, Pentegra Retirement Services
Thanks so much for having me.
Jeffrey Snyder, Broadcast Retirement Network
So we didn’t chase you off, Bruce. It looks like you’re excited to come back. That’s good, we hate to lose guests, although we have never lost a guest.
We’re gonna be talking about cash balance plans today, guys. This is an area where Pentagra has a lot of deep institutional knowledge, and we’ll kind of get into that a little bit. But Bruce, I wanna start with you.
Let’s talk about the basics here. What is a cash balance plan? I think I know, but I know you’re gonna tell me.
Bruce Harrington, Pentegra Retirement Services
Yeah, so think of it as a hybrid between a defined benefit plan and a 401k plan. So participants can see a hypothetical value like they would in a 401k, but they get the actuarial assumptions and the benefits of employer contribution, and if they want, participation in the market. So it’s kind of the best worlds between that DB plan that our parents probably had and the more current 401k or DC plan.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and Kate, I mean, it doesn’t have to be all or nothing. And Bruce was talking about how this is kind of like a DB plan or a pension plan, but also like a qualified plan. You can have both, they can integrate together.
Kate Blake, Pentegra Retirement Services
You can, and we do see that commonly. Cash balance plans really very rarely, especially these days, operate in a silo. And typically we do see exactly what you just described.
We’ll see a 401k style plan that is set up to provide for a profit sharing contribution. And then we’ll see a cash balance plan laid over on top of that. And what that allows you to do is it allows you to reach that employee contribution maximum, the $24,500 in 2026.
And then it allows you to use that profit sharing contribution to get to the annual additions limit of $72,000 within that DC style plan. But then the cash balance overlay is really where we see that power because what it lets us do is it lets us turbocharge retirement savings by taking advantage of limits that are expressed a little bit differently on the DB side of the house, where we can make contributions that take into consideration someone’s age and projected retirement benefits. When we take that all together, that gives us a substantially higher deductible contribution opportunity for owners and key executives while still giving that baseline level of benefit in a profit sharing contribution to the broader employee population.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, Kate, I like that you used the word turbocharge. One of my favorite cars is a Porsche 930 Turbo. Not that I could afford it, but I grew up loving exotic cars.
It’s a great car. But Bruce, I mean, being able to turbocharge the retirement for your employees, it’s so important in today’s world where we’re living longer, we’re working longer. You wanna have a big nest egg.
So when you think about employers that may have an interest in this type of, I’m gonna call it a plan design, for lack of a better term, but you have the integrated cash balance and the qualified plan, the 401k. What type of employers would seriously consider this?
Bruce Harrington, Pentegra Retirement Services
Yeah, there’s no exclusions from a formal perspective, but this plan design works really well for professional services firms. Think doctors, lawyers, consultants, architects, typically smaller companies, but it doesn’t have to be. Companies with a steady cashflow, companies who are willing to commit to a guaranteed contribution for a number of years.
And often what we see is employers who maybe are in their 40s to late 40s who really haven’t put away a lot for their retirement. And they’re at the life stage when they realize that retirement is important, tax deduction is important. So as Kate illustrated, you’re able to put a lot of money away very quickly.
And on average, we see cash balance plans generally lasting about 10 years, right? They get funded, funded, turbocharged, and then roll into the payout stage. Those are all just generalities, but that’s the typical situation.
And CPAs love them because they help the CPA provide a lot of benefit to a company, to an employer, and get a really big tax deduction. So those are the type of firms we generally see.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I can understand why the CPAs like it. I mean, you know, wanna be able to pad your benefit. I mean, it’s a good benefit.
Let’s talk about fees. Fees are a big conversation in the retirement and benefits industry, Kate. Are these plans, cash balance plans, expensive to set up?
We talked a little bit about the contributions that may have to be made, but are they expensive to the employer administratively?
Kate Blake, Pentegra Retirement Services
Typically a cash balance plan will be a little bit more costly and a little bit more labor intensive than your basic plan design. But it is important to consider when you’re working with these employers, what is being obtained in terms of the deduction opportunities and the benefit accumulation opportunities. That’s what you get really in exchange for that expense and the slightly more laborious nature of these plans.
These costs, just to illustrate them a little bit, it could include things like your required minimum contributions, which are indicated in your annual valuation report, your PBGC premium, if applicable, there are some exceptions to that for small businesses, and any ongoing actuarial work, administration and compliance testing, although you’ll see that in your 401k style plans as well.
Jeffrey Snyder, Broadcast Retirement Network
And if you have both a, let’s just say you have one record keeper, like a Pentagra or another record keeper, I’ll call it record keeper A, and you have a qualified plan, 401k, and an integrated cash balance plan, are there economies of scale there, Kate?
Kate Blake, Pentegra Retirement Services
There can be, yes, absolutely, depending on the vendor that you’re working with. If it is a multi-plan situation, that’s always something that’s worth discussing when you’re in that plan design or that new plan setup phase. There are also, just to piggyback on what you just said, some things, some considerations with regard to plan design and plan timing when you are operating in a combo plan structure that should also be discussed at the time of setup.
Jeffrey Snyder, Broadcast Retirement Network
So Bruce, listening to you and Kate talk about the advantages, I think there are very few disadvantages of a cash balance plan, so it sounds like there are a lot of advantages. Let’s talk about our friends in the advisor community. This sounds like a really good value add or an opportunity for them to bring something in addition to what they’re already doing in their practice.
Am I right on that?
Bruce Harrington, Pentegra Retirement Services
You are. So a couple of things. First of all, it helps the financial advisor kind of elevate themselves to really be a trusted advisor and almost be the retirement strategist for these type of companies.
They’re offering something that the average advisor wouldn’t think of or wouldn’t bring to them. We talked about the tax advantages, the ability to put away a lot of money very quickly. It’s also a great opportunity for the advisor to bring value to their CPA partners because again, the CPAs wanna maximize tax deduction and benefit and the advisor can bring it to them.
A lot of advisors also offer the investment management behind these plans. So it’s another pool of money that they can manage very effectively for a small company. It can’t be any investment in the world, right?
So you have to manage to tie to the actuarial assumptions that Kate mentioned, but it is a great way to open doors. We do seminars all the time about cash balance and educate people on both advisors and plan sponsors on how they work, what the benefits are. And really the only big downside is you have to be prepared to make that contribution for a period of time, right?
It’s not something that you wanna be able to stop and start on a year to year basis. So it is a great way to open a door.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I’m sorry, I didn’t mean to interrupt Bruce. I was gonna say that you have to make contributions in the defined contribution plan. So if you’re kind of doing that, maybe it’s a little bit more money, but again, higher productivity, there’s a lot of good results from, we’ve talked about financial wellness with you and others.
It’s really important to make sure that your workforce has the right benefits and are aligned to ensure productivity. Bruce, we’re gonna have to, Bruce and Kate, we’re gonna have to leave it there. Great to see you both.
And look, we look forward to having you back on the program again very soon.
Bruce Harrington, Pentegra Retirement Services
All right, thank you, Jeff.
Kate Blake, Pentegra Retirement Services
Thank you.